Morgan Stanley Investment Management said Malaysia has been a “forgotten market” among foreign investors for over two and half decades.
PETALING JAYA: Malaysia is now “worth another look” thanks to the somewhat stable political scene and the steady economic growth, says Morgan Stanley Investment Management.
The firm’s equity team said, with macro fundamentals improving, there is a strong case for Malaysian equities to return to pre-lockdown levels.
“We believe Malaysian stocks are poised for their strongest year in over a decade, driven by improving industrial activity and resilient consumer spending,” the firm noted.
It said after four years of political turmoil, Malaysia’s recent stability is paving way for the government to implement critical reforms, including the overhaul of costly fuel and power subsidies.
The firm added that Malaysia, as a key beneficiary of the China Plus One strategy, is well-positioned for increased investment, particularly in its expanding data centre sector, capitalising on the ongoing ‘tech war’ between the United States and China.
“Political stability has encouraged much-needed reforms, while the Madani Economy, a 10-year development plan launched in July 2023, aims to reduce red tape, promote economic growth of regions outside Peninsular Malaysia and enhance the efficiency of government-related enterprises,” it added.
The research outfit said Malaysia has been a “forgotten market” among foreign investors for over two and half decades.
“The former Asian tiger was once the largest Asian emerging market by weight in the MSCI Index prior to the Asian Financial Crisis in 1997,” it said.
However, the firm said, over the years, Malaysia has struggled to regain its former glory, “being overshadowed by larger Asian markets like China and India, and the tech prowess of both South Korea and Taiwan.”
It added that even neighbouring Indonesia drew more investor interest as it focused on “down-streaming” in its mining industry. But things are now looking up for Malaysia, as the country benefits from improving macroeconomic fundamentals and strategic reforms.
“The narrowing gap between labour costs and labour productivity, which had surged during the lockdowns, is making Malaysia more competitive in the region,” the firm noted.
The research outfit also expects inflation to remain under control, allowing Bank Negara to hold its policy interest rate at 3%.
“We believe the central bank will be in no hurry to adjust its monetary policy and will hold rates steady for the remainder of the year,” it added.
Despite a slight dip in consumer confidence, the firm said retail sales and lending activity continue to gain momentum, indicating a resilient consumer base.
It pointed out that domestic consumption now accounts for 60% of gross domestic product (GDP), up from 44% in 2008. With the government’s plans to increase the salaries of 1.6 million civil servants by between 7% and 15%, starting in December, consumption is expected to be boosted further.“Balancing fiscal sustainability and managing public discontent will be challenging, though,” the firm said.
It noted that subsidies peaked at 4.3% of GDP in 2023, accounting for nearly 25% of total government expenditure, while this year’s budget projects a reduction in subsidies by over 30%.
The government has already removed support from chicken and eggs, and applied targeted subsidies on diesel and electricity.
The real test, the firm highlighted, will come with the rationalisation of RON95 petrol prices, which accounted for around 60% of subsidies in 2023.
“To mitigate inflation spikes and political backlash, the increase in RON95 petrol prices will likely be phased in,” it noted.
Meanwhile, the research outfit said manufacturing remains central to Malaysia’s economic strategy, contributing 23% to its GDP – higher than most emerging market countries – and accounting for over 80% of its exports.
Based on gross fixed capital formation as a percentage of GDP, the firm said Malaysia saw the first investment wave in the 1980s, which helped transform the country from a commodity-based economy to a manufacturing-based one.
“Penang, a key beneficiary of that early foreign direct investment (FDI), has attracted technology giants like Intel, Advanced Micro Devices and Hewlett-Packard. The state is now focusing on microchip design and wafer fabrication,” it noted.
The second wave, meanwhile, is believed to have occurred between 2008 and 2012 in the aftermath of the global financial crisis.
The firm believes now is the start of Malaysia’s third investment cycle driven by renewed FDI and a stronger focus on high-value industries like semiconductors and data centres.
“But what could go wrong? Prime Minister Datuk Seri Anwar Ibrahim’s coalition needs to navigate a complex political landscape where compromise is essential,” it said.
Although Anwar had flagged anti-corruption as a priority for his government, the research house said the administration has dropped graft charges against coalition members to ensure their loyalty.
“The balancing act between economic future and political stability will be pivotal in unlocking the country’s full potential,” it said.
However, the firm said structural reforms underway should reduce the fiscal deficit and restore investor confidence.
“Anwar has four years before he faces the voters again. If he keeps doing the responsible thing, Malaysia’s prospects look promising,” it concluded.
